The sorry plight of the affluent but confused baby boomer

Page Tools

Baby boomers are worried about retirement. So they're borrowing to fix the problem, writes Ross Gittins.

I would never expect anyone to feel sorry for the baby boomers - they always feel sorry enough for themselves. But there may be something to learn from their sorry plight.

After a lifetime of yielding to the capitalist system's blandishments to borrow and spend, they are now being berated by the capitalists for their failure to save for retirement.

Compared with previous generations, the baby boomers have lived lives of indulgence. But they've been products of their affluent times. Everything around them has encouraged them to live it up.

For one thing, they've lived through a pervasive effort by advertisers and marketers to persuade them that everything their heart desires - beauty, success, good friends, a happy family, even escape from boredom or unhappiness - can be attained by buying something.

There's nothing new about buying stuff, but in the olden days we often had to save up for it. What changed for the baby boomers was a revolution in easy access to consumer credit.

AdvertisementAdvertisement

It began after World War II with the advent of hire purchase, then grew to freely available personal loans and credit cards. The latest is the home-equity loan, where people with equity in their home can borrow for any purpose simply by adding to their mortgage.

Borrowing is about impatience. If you want to buy something but can't wait to save for it, borrowing allows you to have it now and save later as you repay the loan. But the price of impatience is the interest you pay.

Saving involves spending less than all your income on consumption. That's why economists think of saving as "deferred consumption".

Why would anyone want to defer their consumption? So as to smooth it out. They may consume less during their working years to enable them to consume more during their retirement years.

And it's here the capitalist system has suddenly changed its message to the baby boomers. What? You mean to say you've earnt all that income for all those years and saved so little of it? How on earth will you get by in retirement?

AMP recently sponsored a study by the University of Canberra that found that, on average, people aged 50 to 69 who are still in the workforce (which means they'd mainly be the early boomers) have savings through superannuation of just $170,000, plus other savings of about as much.

Now, I believe the banks, life insurance offices and others that make up the super industry are exaggerating this problem, pumping up the baby boomers' expectations about how grandly they should live in retirement.

The industry's urgers are trying to con the Howard Government into increasing compulsory employer contributions or tax concessions because the more of our money they have in their care, the bigger the clip they can take from it each year.

Even so, there's no doubting the marked decline in our saving. Since the mid-1980s, the proportion of their disposable income saved by all Australian households has declined steadily from 12 per cent to minus 2 per cent. (The rate of "dis-saving" means households are now consuming in excess of their income and borrowing to make up the difference.)

Nor is there much doubt that our behaviour during the latest long-running residential property boom does much to explain the recent deterioration in our saving performance - with the baby boomers leading the charge.

Historically, one of the main ways Australians have saved is by paying off their mortgages. So much so that, during the '80s and early '90s, Australian households' repayments of principal exceeded their investment in new homes and renovations by 4 per cent of their disposable income each year. But since 2000 it has swung around, with our investment in new housing now exceeding our repayments of principal by 4.5 per cent of disposable income a year.

Mortgage interest rates halved over the course of the '90s. We might have expected the baby boomers, of all people, to seize this wonderful opportunity to pay off their mortgages early and start salting money away.

Not a bit of it. Like home owners of other ages, most of them used their increased borrowing power to attempt to buy a bigger and better home. Because so many people tried to "trade up" at the same time, however, their main achievement was to bid up the price of homes to double what it was (thus pricing their children out of the housing market).

In confirmation of the baby boomers' part in this, the Canberra Uni study found that workers approaching retirement age now do so with bigger mortgages. In 1986, such people averaged 94 per cent equity in their home. By 2001, the equivalent group was down to 85 per cent.

Separate evidence shows the baby boomers have been prominent among the hordes of people making negatively geared property investments.

Get it? The boomers got panicky, and decided they better start saving in hurry. How? By borrowing virtually all the price of a rental property, then hoping capital gain and various tax lurks would cover the debt and leave them ahead. To my mind, a strange notion of what saving involves. And one that may yet land them in strife.